A new kind of capital fund

A new group of Virginia investors is looking to invest between $150,000 and $250,000 into growing businesses, and reasons it might succeed where others have failed with a social component and low-pressure rules.
New Dominion Angels has 37 dues-paying members split between Northern Virginia and Richmond. The club hosts two dinner meetings a month where startups pitch their concept in hopes of securing funding.

“We wanted to create the kind of group we would want to be members of,” said Mike McGinley, an executive coach and leadership instructor who co-founded the organization with another corporate coach named Frank Ball.

“We want to invest in Virginia companies and, when possible, those that have a social or environmental impact,” he said.

Late last year New Dominion invested in Mom Made Foods, a Northern Virginia company that produces organic food for kids. Heather Stouffer, the founder and CEO, said she found New Dominion on the Internet and made her pitch to the NOVA group one night and the Richmond group the next night. Stouffer said she is almost done raising $1 million, of which New Dominion contributed a chunk.

New Dominion also invested in SBX.com, a network for businesses and professionals to exchange opportunities, resources and information. That company was sold to Deltek Inc. in December 2009 for a 50 percent return.

And last week New Dominion made its third investment in Reston-based ROI², which sells data/intelligence about influential decision-makers in the health-care industry.

Just getting invited to come pitch is no easy feat.

New Dominion receives dozens of business plans and selects two businesses each month to come make their pitch to the members. The members listen to the pitch and then grill the presenter with questions about the growth plan, the demand for the product and the ability to fend off competition.

New Dominion also wants to see the skills and commitment of the management team and a reasonable exit plan, perhaps a public stock offering or a sale to another company.

Then the club decides which businesses are promising enough to research further (due diligence).

If a business passes muster on that next test, the group decides whether it wants to make an investment, and each member can put in whatever he or she wants as long as it’s above the minimum, $7,500. Stouffer said 18 investors put money into her business.

Frank Ball, who like McGinley is an instructor at Georgetown University’s business school, said that it’s a so-called pledge fund. “Rather than be a fund where everyone puts in and we make joined-at-the-hip decisions, we bring investment opportunities to our membership, and only those who are inclined to invest, at whatever rate of participation, go ahead and do so.”

Ball said the group likes to get a seat on the board of its investments.

McGinley and Ball are not the first to try and nurture Virginia startups and make a buck, but history has not been kind to at least two other similar attempts.

In 2000, local service firms including the law firm LeClairRyan, accounting firm Keiter Stephens and advertising firm The Martin Agency, invested between $1 million and $2 million in Ideas2Inc, which aimed to speed up the growth process for local startups.

Ideas2Inc looked at almost 200 business plans, said Stan Maupin, who was president of the group and remains active in the local venture capital world. But many of the investments were related to the Internet, and within six to eight months of opening, the tech bubble burst, Maupin said.

Maupin said the New Dominion concept has several features that may give it an advantage.

“You can pool resources and investment knowledge without having to spend a lot of money doing it. And it’s social,” he said.

“And by the same token, it’s good for the entrepreneur,” Maupin added. “He or she doesn’t have to talk to 25 different people, and that brings some structure to a very unstructured market.”

Then there was Monument Capital.

Founded in 2000, with the backing of successful technology investor turned politician Mark Warner, Monument invested about $20 million. None of Monument’s investments panned out, and the fund closed in 2003.

Perhaps the startup with the most potential was in Homebytes.com, which aimed to find a niche in the for-sale-by-owner real estate market. The company shut down in 2001.

TJ Daly, who managed the fund for the investors, said that, as with Ideas2Inc, the bursting of the Internet bubble killed Monument’s investments. But he learned some valuable lessons about early-stage investing.

“The bigger the fund size, the better. That way you can command more mindshare and influence at a company. Angel investing is as much about the experience and knowledge base of the investor as it is about the cash. And you can really only impart that money and experience if you have mindshare.”

Despite those failures, Richmond sorely needs more venture capital funds, said Andrew White, a lawyer at LeClairRyan who works with startups. And New Dominion’s social component might be the secret sauce that helps strengthen the group, he said.

“I’ve always heard that Richmond doesn’t have the risk-taking culture. Or it’s too conservative for this kind of investment group. But I just don’t buy it,” White said.

“Richmond it a great place for entrepreneurial activity and has a great record for early-stage companies. It’s just that folks who invest in these deals — these cats don’t herd well.”
Coming tomorrow: The University of Richmond’s Business School is holding its annual business plan contest tomorrow evening. BizSense will have full coverage Friday.

7 Comments »

Having worked in the Richmond area with numerous start-ups (my own and others) at the angel and institutional levels, I agree with Mr. White. I simply don’t buy that Richmond investors are too hesitant to commit to start-ups. Good ideas and talented, passionate entrepreneurs can usually attract some level of investment to validate, nurture and grow. While it’s never easy (what is?), the ability to connect and bring forth start-up concepts to angel and institutional investors is fairly open in our community. Like everything else, though, it takes hard work.
Richmond’s entrepreneurial community is continuing to grow . Proof is seen in the on-going (and jam-packed) Venture Forum events and the many start-ups that I see coming to life on a regular basis. Kudos to those who endeavor down the entrepreneurial path, especially in Richmond, for they are the innovation engines that keep our local, regional, and national economies moving forward.

As a co-founder of the Virginia Active Angel Network, LLC, this is GREAT news! Angel groups that are Angel Capital Association members co-invest with each other so if one group cannot make an entire investment, we share due diligence and partner with each other to the increasing benefit of the entrepreneurs. VAAN was started in 2005 and has made 14 investments ranging from $100K to $850K, but is not exclusive to Virginia, though we favor Virginia. However, there is currently a major legislative BLOW about to happen to the angel investing groups that we have started, and that are FINALLY taking hold across the state of Virginia…. and may be short lived if this bill passes with the current language when Congress returns in two weeks. All the work that Mark Herzog at VaBio has been doing to promote Virginia-specific angel investing may also be only for a few groups. Remember, VCs are not as interested in entrepreneurs that have potential legal liabilitiies associated with having investors that are “unaccredited” (aka grandma, the next door neighbor lady who puts in $10K and then says she was goaded into doing it). To avoid this problem, there is “accredited investor” status that currently resides at about $1M net worth, and/or $250K in annual income.

I met Mike McGinley several years ago when he wanted to start this group (and he is a Darden graduate and we always like that!) And though this is fantastic and great for Virginia, there is a much greater threat currently underway in Congress to this type of investing: Senator Dodd’s bill. I am the co-founder and Managing Partner of the Virginia Active Angel Network, LLC (started in 2005) and President of Virginia Investment Capital Group, Inc. As such, we are members of the Angel Capital Association and I serve on the Legislative committee. In the past 3 weeks the ACA Legislative committee, comprised of ACA members from multiple states, has been urgently at work, along with several gracious pro-bono attorneys and CPAs, crafting language to essentially try to carve out the provisions that would make it all but illegal for anyone whose net worth doesn’t approach (indexed since 1982) $2.5M and/or an annual single salary of over $350K and combined salary of over $700K; and it seeks to repeal the Federal oversight over Regulation D, which would then require that any angel investment seeking funds with individual angels or groups of individual angels like New Dominion, would NOT be able to financially afford to “navi-guess” all the myriad state regulations. As well, there is a proposed 120 day Federal Review of all investment projects such as is described in the New Dominion deals, THEN it would be released to the States’ laws if you seek capital there.

What the “indexed for inflation since 1982” clause does is effectively make it impossible for most rural areas (and rural states like Virginia in most of the state) to have sufficient credible angel investors. It will (possibly unintentionally, but nonetheless) create angel investing for companies ONLY in areas where the houses are by cost of living, valued high enough that angels can invest.

The biggest issue here is that early and seed-stage companies that take in “non-accredited investor” funds will have to comply with Regulation D of the Securities and Exchange Commission, which is prohibitively expensive. And, though angel investors currently self-certify that they comply, the proposed 120 day wait time for Federal oversight will kill most opportunities.

The Angel Capital Association, a Kauffman Foundation organization and with its help, did a survey of angel groups across the country three weeks ago and determined that 77% of all current angel investors would not qualify as angel investors. And, with house values plummeting, even if you are retired, have $1M in the bank and your beautiful $700K house is down in value but fully paid off, you would not qualify. Though nothing will have changed in your circumstances, you can no longer participate otherwise you will be legally jeopardizing the entrepreneur and their circumstances by being in Non-compliance with the SEC’s proposed REGULATION D changes (repeal of the Federal oversight of REG D, and the 120 day wait for oversight… like that deadline’s going to be met!) .

This is a really important issue and I hope you, and especially those that are interested in joining all the up-and-coming angel groups, or just angel investing on your own, will look into the issue through the Angel capital Association web site and send a FAX (they say nothing else really gets read or logged!) to Senator Dodd, your own congressional rep and Senators, as Warner is also on the committee and already voted FOR this legislation (out of committee) last week!

THE SITE BELOW IS THE MOST COMPREHENSIVE SITE WITH RESOURCES, TOOLS & EDUCATION FROM THE ACA: Send a letter to your Congressman by looking at the letters and choices, and education yourself. DO NOT let VIRGINIA go down as a “rural” state with insufficiently qualified investors and entrepreneurs that suffer because they can’t afford to accept funds from newly “unaccredited” investors that may come out of the DODD BILL!

And, a big thank you goes to Carl Johnson and Richmond Venture Forum for getting involved when they received my email and letters alerting the investing and entrepreneurial community to this issue. Thank you. I’ve received many emails on others’ lists indicating that they did in deed take your eblast last week to heart. Here’s to keeping up the pressure.

Dr. Jeff Harrison, W. David Robbins Chair in Strategic Management, and Jeffrey Pollack, Ph.D. and Assistant Professor of Management, are creating an amazing program for the student. It would enrich both communities if Venture Forum members would reach out these professors and Remo Kommnick, President of the Entrepreneurship Club, pollinate ideas across academia and the real world.

I had the privilege of judging eight of the student business plans last night (mentioned at the end of the article). All the presentations were impressive and several of them have real market potential. As a former commercial bank lender and SBA underwriter I know these students would not qualify for any type of traditional bank funding.

To our accountant, investor, lawyer, lender communities: Please continue taking Letitia’s message to heart and work together to prevent this legislation from passing. Out of one side of its mouth the federal government admits that we have an “access to capital” problem…but the focus is typically around bank lending and credit cards. By tying the hands of knowledgable and willing investors this same government further diminishes the accessible capital.

Please remind our legislators that we will never solve the workforce problem by forfeiting the next generation of Snag-a-Job, Rainbow Station, CarMax and even Homebytes (industry transforming) opportunities.

So glad to see all the comments here and thought I would add my two cents:

* We do all need to rally against the legislation as Letitia mentions. Angel groups having accredited investors, like VAAN and New Dominion Angels, would be seriously jeopardized by the new standards for accreditation. Though the NoVa part of our group would probably survive, the legislation could be a death blow to the Richmond half of the group..
* I judged at UR with Linda last night and agree with her take. There is some very powerful entrepreneurial spirit building at the Robins School and I wold like to see the community continue to rally around them and support them in every way we can. New Dominion Angels will host the 1st and 2nd-place finishers in our April meetings – these student teams will have the chance to pitch to our members and to get the rich feedback that comes from the experience.

Let’s all continue to make Richmond and Central VA into an entrepreneurial hotbed!